FDI
FDI Investing resources in an external country in order to conduct business activities in that country is known as Foreign Direct Investment (FDI) (text book, p.13). FDI can be further categorised into the inflow FDI and outflow FDI which measure the incoming and outgoing foreign investments into a country in a given period of time. The measure of accumulative FDI at any point of time defines "the stock of foreign direct investment". __________________________ research material: FOREIGN INVESTMENT Foreign direct investment, FDI in the Philippines has increased rapidly since 1993, due to major liberalisation of the investment regime but still remains low by ASEAN standards. The most important sectors for FDI are manufacturing, banking, infrastructure and public utilities, where reform has been most rapid. In sectors such as mining and agriculture, where trade and legal reform and implementation are lagging, FDI flows have been weak. Dominant sources of Philippine FDI are Japan, followed by the USA. Australia’s FDI flows to the Philippines are small and volatile, with strongest growth occurring in the late 1980s and 1994 and 1995. In spite of the Asian financial market turmoil, 1997 was also a strong year for Australian FDI. The biggest FDI destination is manufacturing, but FDI in public utilities, infrastructure and industrial services also has grown rapidly in recent years. 3 Executive SummaryExecutive Summary The major factors inhibiting further FDI in the Philippines include the relatively high cost of unskilled labour (less serious after the recent depreciation), lack of infrastructure, lack of support industries and concern about commitment to the reform process. Given the relative strength of Australia’s mining companies and their interest in investing in the Philippines, slow government decision making and review processes are a particularly important constraint to Australian FDI in the Philippines. Special economic zones increasingly are attracting investment to the Philippines and driving economic and particularly export growth. While comprehensive incentives packages contribute to the growth of zone investment, these incentives require rationalisation. Universal incentives applying inside and outside zones would be more efficient, causing firms to locate in zones only if proximity to suppliers, customers or infrastructure warranted this, rather than to obtain fiscal incentives. http://www.dfat.gov.au/publications/pdf/philip_exsum.pdf _________________________ The Asian economic crisis triggered by the events in Thailand in the second quarter of 1997 occasions another look into FDI in the Philippines, this time within the context of the divergence in the movement of FDI flows into the five Asian countries. This new inquiry relies on the notion that factors associated with the eruption of the crisis may have also affected variations in the movements of FDI flows. When compared with the yearly movements of portfolio investments, it would appear that the FDI flows have been quite stable. Similarly, the non-tradable sectors of public utilities and construction received a large share of FDI in 1997. Also, while internal markets have contributed to the variations in FDI for the decade of the seventies and eighties, FDI has not been positively associated with exports. FDI and exports are in effect substitutes reinforcing the positive contribution of internal markets to the inflows of FDI into the country. A technical analysis on FDI inflows using log-linear multiple regression techniques for the period 1985-1997 revealed some interesting insights into the behavior of FDI into the Philippines. The policy environment relating to trade and investment, among others, is especially crucial for the flows of FDI to be smooth over a long horizon. First, movements of the country’s stock prices have exerted a positive effect on FDI. Increased rates of returns among industries in the sample data lead to increases in FDI inflows. Third, FDI decisions will also rely on the cost structure of the country relative to other FDI destinations. As costs in the Philippines fall relative to the rest of the alternative destination, the more likely will FDI flow into the country. However calculated, it is expected that as this exchange rate depreciates, more FDI flows into the country other things being equal. In the fourth place, and related to the exchange rate, an important element that usually distinguishes whether FDI is export promoting or import substituting is the effect of the country’s protection structure on foreign investment flows. Aside from analyzing the behavior of aggregate FDI into the Philippines, seven sectors were examined. Based on the pooled data for all sectors, the strongest determinant of FDI flows during the period is effective protection rate. In the individual sector results, the effective protection rate appears to be the dominant determinant of FDI flows into these sectors. The second factor driving FDI flows is the movement of stock prices in the country. However the responsiveness of FDI to this variable is not as strong as the protection system in the country. But needless to say this actually reinforces the importance of domestic market in the flow of FDI. In terms of sectors, stock prices have a secondary strong effect on FDI in manufacturing. Further, the amount of commercial credits leads to a reduction in the amount of FDI inflows – a one percent increase in commercial credit reduces FDI by about 0.6 percent. On the other hand an increase of one percent in rates of returns increase FDI by about 0.25 percent. For the tradable sectors, stock price indices and commercial credits are pacing the movement of FDI in specific sectors with rates of returns having the least inducement for capital flows. The FDI flows into the non-tradable sectors tell a different 3story. The factors that seem to smoothly explain FDI into the tradable goods sector do not matter to the FDI flows into the non-tradable sectors. The former depicts the magnitude of the domestic markets in FDI inflows. http://www3.pids.gov.ph/ris/taps/tapspp9815.pdf